QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the Quarterly Period Ended April 1, 2011

o

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 1-9309

(Exact name of registrant as specified in its charter)

DELAWARE

54-0852979

(State or other jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

6850 Versar Center

Springfield, Virginia

22151

(Address of principal executive offices)

(Zip Code)

Registrants telephone number, including area code (703) 750-3000

Not Applicable

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of
the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company þ

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practical date.

The accompanying (a) condensed consolidated balance sheet as of June 25, 2010, which has been
derived from audited financial statements, and (b) the unaudited interim condensed consolidated
financial statements are presented in accordance with the requirements of Form 10-Q and Regulation
S-X and consequently do not include all of the disclosures normally required by accounting
principles generally accepted in the United States of America for complete financial statements or
those normally made in Versar, Inc.s Annual Report on Form 10-K filed with the United States
Securities and Exchange Commission. These financial statements should be read in conjunction with
the Companys Annual Report filed on Form 10-K for the fiscal year ended June 25, 2010 for
additional information.

The accompanying condensed consolidated financial statements include the accounts of Versar,
Inc. and its wholly-owned subsidiaries (Versar or the Company). All significant intercompany
balances and transactions have been eliminated in consolidation. The financial information has
been prepared in accordance with the Companys customary accounting practices. Certain adjustments
to the financial statements are necessary for fair presentation and are of a normal recurring
nature as part of the operations of the business. In the opinion of management, the information
reflects all adjustments necessary for a fair presentation of the Companys consolidated financial
position as of April 1, 2011, and the results of operations for the nine-month and three-month
periods ended April 1, 2011 and March 26, 2010. The results of operations for such periods,
however, are not necessarily indicative of the results to be expected for a full fiscal year.

The Companys fiscal year is based upon a 52  53 week calendar, ending on the Friday nearest
June 30. The fiscal year ending July 1, 2011 is a 53 week period and fiscal year ended June 25,
2010 is a 52 week period.

(B) Accounting Estimates

The financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America, which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results may differ from those estimates.

(C) Contract Accounting

Contracts in process are stated at the lower of actual cost incurred plus accrued profits or
incurred costs reduced by progress billings. The Company records income from major fixed-price
contracts, extending over more than one accounting period, using the percentage-of-completion
method. During performance of such contracts, estimated final contract prices and costs are
periodically reviewed and revisions are made as required. The effects of these revisions are
included in the periods in which the revisions are made. On cost-plus-fee type contracts, revenue
is recognized to the extent of costs incurred plus a proportionate amount of fee earned, and on
time-and-material contracts, revenue is recognized to the extent of billable rates times hours
delivered plus material and other reimbursable costs incurred. Losses on contracts are recognized
when they become known. Disputes arise in the normal course of the Companys business on projects
where the Company is contesting with customers for collection of funds because of events such as
delays, changes in contract specifications and questions of allowable costs or collectability.
Such disputes, whether claims or unapproved change orders in the process of negotiation, are
recorded at the lesser of their estimated net realized value or actual costs incurred and only when
realization is probable and can be reliably estimated. Claims against the Company are recognized
where loss is considered probable and reasonably determinable in amount. Management reviews
outstanding receivables on a regular basis and assesses the need for reserves taking into
consideration past collection history and other events that bear on the collectability of such
receivables.

As of April 1, 2011 and June 25, 2010, the Company had approximately $1.6 million and $1.5
million, respectively, in net deferred income tax assets, which primarily relate to temporary
differences between financial statement and income tax reporting. Such differences include
depreciation, deferred compensation, accruals and reserves. A valuation allowance is established,
as necessary, to reduce deferred income tax assets to the amount expected to be realized in future
periods.

(E) Debt

The Company has a line of credit facility with United Bank (the Bank) that provides for
advances up to $10 million based upon qualifying receivables. The line of credit is subject to
certain covenants related to the maintenance of financial ratios. These covenants require a
minimum tangible net worth of $17.5 million; a maximum total liabilities to tangible net worth
ratio not to exceed 2.5 to 1; and a minimum current ratio of at least 1.25 to 1. Borrowings under
the line of credit bear interest at prime less 1/2% with a floor interest rate of 4.5% (interest rate
was 4.5% at April 1, 2011). Failure to meet the covenant requirements gives the Bank the right to
demand outstanding amounts due under the line of credit, which may impact the Companys ability to
finance its working capital requirements. As of April 1, 2011, the Company had approximately
$2,353,000 in outstanding borrowings and was in compliance with the financial covenants of the
credit facility. The Company had no outstanding borrowings under this line of credit as of June
25, 2010. The Company has a letter of credit of approximately $455,000 outstanding under the line
of credit facility which serves as collateral for surety bond coverage provided by the Companys
insurance carrier against project construction work. The letter of credit reduces the Companys
availability on the line of credit. Availability under the line of credit at April 1, 2011 was
approximately $7.2 million. Obligations under the credit facility are guaranteed by Versar and
each of its domestic subsidiaries individually and are secured mainly by accounts receivable and
equipment plus all insurance policies on property constituting collateral of Versar and its
domestic subsidiaries. The line of credit matures on September 25, 2011.

As part of the PPS acquisition in January 2010, the Company issued notes payable with
principal amounts totaling $940,000, which are payable quarterly over a two year period and bear
interest of 5%. As part of the Advent acquisition in March 2010, the Company issued notes payable
with principal amounts totaling $1,750,000, which are payable quarterly over a two year period and
bear interest of 5%. At April 1, 2011, the principal balances of the notes payable were
approximately $522,000 and $875,000 for PPS and Advent, respectively. Principal plus accrued
interest are included in notes payable current in the accompanying balance sheet.

(F) Notes Receivable

In June and July 2009, the Company provided interim debt financing to General Power Green
Energy, LLC (GPC) to fund certain GPC project start up costs. The project involves the
construction of a 15 mega watt co-generation plant that burns landfill gas in turbine engines
equipped with a steam generation unit. The note has a current principal balance of $550,000,
carries an annual interest rate of 10%, currently is due in full in May 2011 (recently extended
from a due date of March 31, 2011) and is secured by the assets of GPC. Accrued interest
receivable on the GPC note is approximately $87,000, at April 1, 2011. Versar received a 20%
ownership interest in GPC in connection with providing the loan. As of April 1, 2011 and June 30,
2010, the carrying value of this 20% interest was $0.

In July 2009, the Company provided a $750,000 loan to Lemko Corporation (Lemko) for the
purchase of long lead telecommunication equipment for several upcoming projects. The note bears
interest at a rate of 12% and was originally due May 31, 2010. On May 28, 2010, the Company
extended the loan to Lemko through September 30, 2011, and agreed to equal quarterly payments
commencing on December 31, 2010 of $187,500 plus accrued interest. In August 2010, Lemko paid
approximately $62,000 in interest due on the note. In December 2010, Lemko paid $187,500 in
principal plus outstanding interest of approximately $32,000. In March 2011, Lemko paid the second
installment of $187,500 in principal plus accrued interest of approximately $16,000. At April 1,
2011, outstanding principal on the Lemko note was $375,000. In connection with the May 28, 2010
extension of the loan agreement, the Company received warrants from Lemko to purchase 182,400
shares of Lemko common stock with an exercise price of $4.11 per share. The warrants expire on
June 30, 2015. The Company has determined the fair value of the warrants is immaterial and has not
assigned a value to them.

Because the Company only has two notes receivable within its portfolio of financing
receivables, the methodology for determining the allowance for doubtful accounts is based on the
review of specific facts and circumstances of both the receivables and the respective borrowers,
including the inherent risk of the borrowers being private closely-held companies. During its
analysis of collectability, management assesses factors such as existing economic conditions of the
borrowers and the borrowers industries, each borrowers repayment history related to the notes,
and other external factors that may impact the repayment of the notes receivable by the borrower.
A reserve against the notes receivable will be recorded when there is a specific risk of
collectability. A write-off of a note receivable will occur when it has been deemed uncollectable,
based on managements judgment. Managements collectability analysis has concluded that no
allowance for doubtful accounts is appropriate as of April 1, 2011. During the nine-month periods
ended April 1, 2011 and March 26, 2010, there were no changes to the allowance for doubtful
accounts for the GPC and Lemko notes receivable because the Company did not deem it necessary to
record any reserves for these notes during these periods.

(G) Intangible Assets

As part of the acquisitions of Professional Protection Systems Limited (PPS) and Advent
Environmental, Inc. (Advent) in fiscal year 2010, the Company recorded intangible assets of
$1,311,000 and $678,000, respectively. The intangible assets for PPS and Advent are being
amortized over a 7 year and 5 year period, respectively, and consist of the following:

Amortization expense of intangible assets was $80,700 and $242,300 for the three and nine
month periods ending April 1, 2011, respectively. Expected future amortization expense is as
follows (in thousands):

Fiscal Years

Amount

(in thousands)

2011 (3 months)

$

81

2012

323

2013

323

2014

323

2015

289

Thereafter

281

Total

$

1,620

Goodwill: The carrying value of goodwill is approximately $5,758,000 as of April 1, 2011
relating to the acquisition of Versar Global Solutions, Inc., PPS, Limited and Advent. In
performing its goodwill impairment analysis in the fourth quarter of each fiscal year or when a
triggering event occurs that may indicate possible impairment, management utilizes a market-based
valuation approach in addition to discounted cash flows to determine the estimated fair value of
the acquired entities in the business segments where those entities reside. Management engages
outside professionals and valuation experts annually, as necessary, to assist in performing this
analysis and will test more often if events and circumstances warrant it. Should the business
segments financial performance not meet estimates, then impairment of goodwill would have to be
further assessed to determine whether a write down of goodwill value would be warranted. If such a
write down were to occur, it would negatively impact the Companys financial position and results
of operations. However, it would not impact the Companys cash flow. No impairment charges were
recorded in the three- and nine-month periods ended April 1, 2011 or March 26, 2010.

(H) Net Income per Share

Basic net income per common share is computed by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted net income per common share also
includes common stock equivalents outstanding during the period, if dilutive. The Companys common
stock equivalent shares consist of shares to be issued under outstanding stock options and unvested
shares of restricted stock.

For the three month periods ended April 1, 2011 and March 26, 2010, options to purchase
approximately 163,000 and 270,000 shares of common stock, respectively, were not included in the
computation of diluted earnings per share because the effect would be anti-dilutive. For the
nine-month periods ended April 1, 2011 and March 26, 2010, options to purchase approximately
163,000 and 300,000 shares of common stock, respectively, were not included in the computation of
diluted earnings per share because the effect would be anti-dilutive.

The Company has an Employee Stock Purchase Plan (ESPP) to allow eligible employees of Versar
the opportunity to acquire an ownership interest in the Companys common stock. As amended, the
ESPP permits employees to purchase shares of Versar common stock from the open market at 95% of its
fair market value. The ESPP qualifies as an employee stock purchase plan under Section 423 of
the Internal Revenue Code.

(J) Share-Based Compensation

In November 2010, the stockholders approved the Versar, Inc. 2010 Stock Incentive Plan (the
2010 Plan). Directors, officers, and employees of the Company and its affiliates may be granted
incentive awards to directors, officers, and employees of the Company and to affiliates and service
providers to the Company. Under the 2010 Plan, although only employees may receive stock options
classified as incentive stock options, also known as ISOs. One million shares of common stock
were reserved for issuance under the 2010 Plan. The 2010 Plan is administered by the Compensation
Committee of the Board of Directors. The per share exercise price for options and SARS granted
under the 2010 Plan shall be established by the Committee. However, the per share exercise price
shall not be less than 100% of the fair market value of the common stock on the date of the grant.
At April 1, 2011, there were approximately 992,000 shares available for future issuance under the
2010 Plan.

The Company also maintains the Versar 2005 Stock Incentive Plan (the 2005 Plan), Versar 2002
Stock Incentive Plan (the 2002 Plan), the Versar 1996 Stock Option Plan (the 1996 Plan) and the
Versar 1992 Stock Option Plan (the 1992 Plan). There are no shares available for future grants
under these plans.

During the first nine months of fiscal year 2011, the Company awarded 51,500 shares of
restricted stock to executive officers, employees and Board members. The awards were issued
pursuant to the Versar, Inc. 2002, 2005 and 2010 Plans and they vest over a period of one to two
years following the date of grant. Share-based compensation expense relating to all outstanding
restricted stock and option awards totaled $127,000 and $279,000 for the nine months ended April 1,
2011 and March 26, 2010, respectively. Share-based compensation expense for the three-month
periods ended April 1, 2011 and March 26, 2010 was $58,000 and $69,000, respectively. These
expenses were included in the direct costs of services and overhead and general and administrative
lines of the Condensed Consolidated Statements of Operations.

A summary of activity under the Companys stock incentive plans for both ISOs and
non-qualified options as of April 1, 2011 and during the nine-month period ending April 1, 2011is
presented below:

In July 2010, the FASB issued authoritative guidance that enhances disclosures about the
credit quality of financing receivables and the allowance for credit losses. The guidance is
intended to provide additional information to assist financial statement users in assessing an
entitys credit risk exposures and evaluating the adequacy of its allowance for credit losses.
During the nine-months ended April 1, 2011, the Company adopted this accounting guidance. On
December 31, 2010, the Company began to disclose the required information about the credit quality
of its receivables. On January 1, 2011, the Company began to disclose the required information
about the activity of its allowance for doubtful accounts. The adoption of this guidance did not
impact the Companys consolidated financial position, results of operations or cash flows, as its
requirements are disclosure-related in nature. Refer to Note F for enhanced disclosure on the
Companys financing receivables as required by the adoption of this new guidance.

Recently Issued Accounting Guidance

In December 2010, the FASB issued authoritative guidance on the goodwill impairment test for
reporting units with zero or negative carrying amounts. The new accounting guidance modifies step
1 of the impairment test whereby an entity should consider whether there are any adverse
qualitative factors that may exist that would indicate it is more likely than not that a goodwill
impairment exists. This may result in companies reporting goodwill impairments sooner as compared
to under the current accounting guidance. This new accounting guidance is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2010 and will apply to
the Company beginning with its fiscal year starting July 2, 2011. Early adoption of this guidance
is not permitted. The Company will evaluate the impact of this guidance on its financial condition,
and results of operation upon adoption.

In December 2010, the FASB issued interpretive guidance on the pro forma revenue and earnings
disclosure requirements for business combinations. The interpretive guidance specifies that an
entity should disclose revenue and earnings of the combined entity as though the business
combination that occurred during the year had occurred as of the beginning of the comparable prior
annual reporting period. Also, supplemental pro forma disclosures should be expanded to include a
description of the nature and amount of material, non-recurring pro forma adjustments directly
attributable to the business combination included in the reported pro forma revenue and earnings.
This new accounting guidance is effective for a business combination with an acquisition date on or
after the beginning of the first annual reporting period beginning on or after December 15, 2010
(which is June 30, 2011 for the Company). Early adoption of this guidance is permitted. The
Company will implement this guidance for any future business combinations.

(L) Fair Value Measures

Financial assets and liabilities

The Company analyzes its financial assets and liabilities measured at fair value and
categorizes them within the fair value hierarchy based on the level of judgment associated with the
inputs used to measure their fair value in accordance with the authoritative guidance for fair
value instruments and the fair value option for financial assets and financial liabilities.

The levels as defined by the fair value hierarchy are as follows:

Level 1  Inputs are unadjusted, quoted prices in active markets for identical
assets or liabilities at the measurement date.

Level 2  Inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly at the
measurement date.

Level 3  Inputs are unobservable for the asset or liability and usually reflect the
reporting entitys best estimate of what market participants would use in pricing the
asset or liability at the measurement date.

The Company applies fair value techniques on a non-recurring basis associated with (1) valuing
potential impairment losses related to goodwill which are accounted for pursuant to the
authoritative guidance for intangibles  goodwill and other, (2) valuing potential impairment
losses related to long-lived assets which are accounted for pursuant to the authoritative guidance
for property, plant and equipment, and (3) valuing an asset retirement liability initially measured
at fair value under the authoritative guidance for asset retirement obligations.

The Company currently has four separate business segments. Goodwill impairment is tested at
the reporting unit level. During this reporting period, goodwill is associated with the Program
Management business segment, PPS, which is part of the National Security business segment and
Advent, which is part of the Compliance and Environmental Programs business segment. The Company
determines the fair value of these business segments based on a combination of inputs including the
market capitalization of the Company as well as Level 3 inputs such as discounted cash flows which
are not observable from the market, directly or indirectly. The Company conducts the goodwill
impairment analysis annually during the fourth quarter of the fiscal year, and upon the occurrence
of certain triggering events. No such triggering events occurred during the nine-month periods
ended April 1, 2011 or March 26, 2010.

The Company tests for the impairment of long-lived assets when triggering events occur and
such impairment, if any, is measured at fair value. The inputs for fair value of the long lived
assets would be based on Level 3 inputs as data used for such fair value calculations would be
based on discounted cash flows which are not observable from the market, directly or indirectly. In
fiscal year 2011, there have been no triggering events associated with reporting units carrying
long-lived assets and thus no impairment analysis was conducted during the period.

The Company records its earn-out liabilities associated with previous acquisitions (refer to
Note N) at fair value on a recurring basis. This is a Level 3 liability based on the Companys use
of estimated cash flows in order to estimate the fair value as of each reporting date. As of April
1, 2011 and June 25, 2010, the Company estimated the fair value of these earn-out liabilities to be
$1,144,000 and $543,000, respectively. The following table sets forth the reconciliation of
changes in fair value measurements of this Level 3 liability:

Level 3

(in thousands)

Balance at June 26, 2010

$

543

Issuances



Settlements



Changes in fair value

564

Effect from foreign currency translation

37

Transfers into Level 3



Transfers out of Level 3



Balance at April 1, 2011

$

1,144

The carrying amounts of Versars cash and cash equivalents, accounts receivable, notes
receivable, line of credit, accounts payable notes payable, and amounts included in other current
assets and current liabilities that meet the definition of a financial instrument approximate fair
value because of the short-term nature of these amounts.

The increase in the earn-out liabilities as of April 1, 2011 was a result of the Companys
measurement on that date of the fair value of the contingent consideration related to previous
acquisitions. The increase is a result of an increase in performance of the acquired businesses.
The Company has recorded this change, net of foreign currency translation adjustments, of $464,000
and $564,000 as other expenses on the statement of operations during the three- and nine-month
periods ended April 1, 2011, respectively.

The Company evaluates and measures the performance of its business segments based on gross
revenue, and gross profit. As such, selling, general and administrative expenses, interest and
income taxes have not been allocated to the Companys business segments.

The Companys business is currently operated through four business segments as follows:
Program Management, Compliance and Environmental Programs, Professional Services, and National
Security.

These segments were segregated based on the nature of the work, business processes, customer
base and the business environment in which each of the segments operate as evaluated by the chief
operating decision maker for which discrete financial information is available for these segments.

The Program Management business segment manages larger more complex projects with business
processes and management different from the rest of the Company. The Compliance and Environmental
Programs business segment provides regulatory and environmental consulting support to several
federal government and municipal agencies. The Professional Services business segment provides
outsourced personnel to various government agencies providing our clients with cost-effective
resources. The National Security business segment provides unique solutions to government and
commercial clients including testing and evaluation and personal protective systems.

Summary of financial information for each of the Companys segments follows:

For the Three-Month Periods Ended

For the Nine-Month Periods Ended

April 1,

March 26,

April 1,

March 26,

2011

2010

2011

2010

GROSS REVENUE

Program Management

$

14,608

$

13,993

$

41,738

$

45,858

Compliance and
Environmental Programs

6,528

2,956

23,843

9,888

Professional Services

3,471

3,293

10,242

9,161

National Security

6,880

4,113

26,868

8,549

$

31,487

$

24,355

$

102,691

$

73,456

GROSS PROFIT(A)

Program Management

$

2,555

$

1,110

$

4,895

$

4,290

Compliance and
Environmental Programs

732

(284

)

2,301

(444

)

Professional Services

528

520

1,674

1,449

National Security

397

(87

)

1,813

45

4,212

1,259

10,683

5,340

Selling, general and
administrative expenses

(2,380

)

(2,256

)

(6,384

)

(6,469

)

Other expenses

(464

)

(1,269

)

(564

)

(1,269

)

OPERATING INCOME (LOSS)

1,368

(2,266

)

3,735

(2,398

)

OTHER EXPENSE (INCOME)

Interest income

(35

)

(41

)

(155

)

(106

)

Interest expense

44

25

144

47

INCOME (LOSS) BEFORE
INCOME TAXES

$

1,359

$

(2,250

)

$

3,746

$

(2,339

)

(A)

Gross profit is defined as gross revenue less purchased services and materials and direct costs of services and overhead.

Managements Discussion and Analysis of Financial Condition and Results of
Operations

This report contains certain forward-looking statements which are based on current
expectations. Actual results may differ materially. The forward-looking statements may include,
without limitation, those regarding the continued award of future work or task orders from
government and private clients, cost controls and reductions, the expected resolution of delays in
billing of certain projects, and the possible impact of current and future claims against the
Company based upon negligence and other theories of liability. Forward-looking statements involve
numerous risks and uncertainties that could cause actual results to differ materially, including,
but not limited to, the possibility that the demand for the Companys services may decline as a
result of possible changes in general and industry specific economic conditions and the effects of
competitive services and pricing; the possibility that the Company will not be able to perform work
within budget or contractual limitations; one or more current or future claims made against the
Company may result in substantial liabilities; the possibility that the Company will not be able to
attract and retain key professional employees; changes to or failure of the Federal government to
fund certain programs in which the Company participates; delays in project funding; and such other
risks and uncertainties, described in our Form 10-K for fiscal year ended June 25, 2010 and in
other reports and other documents filed by the Company from time to time with the Securities and
Exchange Commission.

Overview:

We are a global project management company providing sustainable solutions to government and
commercial clients in construction management, environmental services, munitions response,
telecommunications, and energy. We provide tailored and secure solutions in harsh environments and
offer specialized abilities in rapid response, classified projects, and hazardous material
management.

We are a full-service company with 13 offices in the continental United States and five
offices overseas. We focus on both organic and acquisitive growth to expand our revenue base,
diversify our geographic reach, and increase our service offerings. As of April 1, 2011 we had
approximately 520 employees worldwide.

We derive our revenue from project management services related to construction management,
environmental services, munitions response, telecommunications, and energy in four primary service
areas: Program Management, Compliance and Environmental, Professional Services, and National
Security. As a service-based company, our revenue is primarily derived through the provision of
labor based services, rather than capital intensive service offerings. Our revenue opportunities
are driven by our ability to retain existing clients and attract new ones, providing quality and
responsive project management at competitive rates and identifying and retaining a qualified team
of employees. We provide our Project Management services to various industries that serve both
government and commercial clients. Our largest client is the Department of Defense, which accounts
for approximately 80% of our aggregate revenue base. A summary of revenue generated from the
Companys client base is as follows:

Managements Discussion and Analysis of Financial Condition and Results of
Operations (continued)

Our reportable segments consist of Program Management, Compliance and Environmental,
Professional Services, and National Security. These segments reflect a mix of business that we
believe will provide sustained growth and profitability while retaining strong technical
capabilities and are further described below:

Program Management: The Program Management business segment is the largest component of the
Companys business base. During fiscal year 2011, the Program Management business segment
performed construction related services in Iraq, Afghanistan, the United Arab Emirates, and the
continental United States. These programs include our Air Force construction management and
quality assurance work to support the rebuilding efforts in Iraq and Afghanistan and our Task Force
Safe project conducting electrical inspections and personal services support contract with the U.S.
Army Corps of Engineers in Iraq. We also provide personnel to the U.S. Army to manage quality
assurance on Army projects in Iraq and infrastructure related construction work in the United
States. Our program management services related to telecommunications also resides in this
business segment.

Compliance and Environmental: The Company provides full service support for regulatory
compliance programs involving air, water, cultural resources, chemical, and transportation
industries. The Company has supported the Environmental Protection Agency for the past 25 years
providing technical risk assessments and peer reviews for pollution prevention. Furthermore, the
Company provides support to the U.S. Army Corps of Engineers and many local municipal entities to
help with environmental compliance, biological assessments, resource management, and greenhouse gas
emission inventories and mitigation strategies.

Professional Services: The Company provides onsite environmental management and professional
services to over 20 Department of Defense (DoD) installations and industrial facilities. Our
onsite professional services are an increasingly attractive alternative as DoD shifts emphasis to
its core military mission. The Companys Professional Services business segment has grown to over
100 professional and administrative onsite support staff and is focused on obtaining larger
contract opportunities to further expand our client base.

National Security: The Company provides national security services primarily through the
operations of our subsidiaries GEOMET Technologies, LLC (GEOMET) and Professional Protections
Services, Ltd. (PPS). The National Security business segment operates in several defense markets
with specialization in Chemical and Biological services including personal protective product
manufacturing, testing and laboratory services. In addition the Companys contracts in Unexploded
Ordnance (UXO) and Military Munitions Response Programs (MMRP) in California and Nevada reside in
this business segment.

Managements Discussion and Analysis of Financial Condition and Results of
Operations (continued)

Our quarterly and annual revenue, expenses and operating results have and may continue to
fluctuate significantly because of a number of factors including:



General economic or political conditions;



Threatened or pending litigation;



The timing of expenses incurred for corporate initiatives;



Employee hiring, utilization, and turnover rates;



The seasonality of spending in the federal government and for commercial clients;



Delays in project contracted engagements;



Unanticipated contract changes impacting profitability;



Reductions in prices by our competitors;



The ability to obtain follow-on work;



Failure to properly manage projects resulting in additional costs;



Failure to effectively integrate acquired businesses into our business model;



The cost of compliance for the Companys laboratories;



The results of a negative government audit potentially impacting our costs, reputation and
ability to work with the federal government;



Loss of key personnel;



The ability to compete in a highly competitive environment;



Federal funding delays due to wars in Iraq and Afghanistan;



Loss of small business status; and



Federal government funding lapse or shutdown.

Variations in any of these factors could cause significant fluctuations in our operating
results from quarter to quarter and could result in net losses and have a material adverse effect
on our share price.

Business Trends

General: In the third quarter of fiscal year 2011 we delivered solid financial results that
reflected improvement in net income and revenue compared to the same quarter last year. Our
improved performance was driven by both an aggressive growth strategy and cost reduction efforts
targeted on our fixed and controllable expenses. We continue to invest heavily in business
development activities and our internal technology infrastructure, and we recognized increased
revenue from our acquisitions completed during the third quarter of FY 2010. The Company remains
focused on identifying additional complementary businesses to integrate into its existing business
segments to compliment organic growth and strengthen the Companys overall depth and backlog.

We foresee continued pressure and weakness in the United States and World economy with slow
and gradual economic recovery. During periods of economic uncertainty and volatility, our Federal
government business has historically been the most stable and predictable. However, the growing
Federal deficit and uncertainty in our Federal government and Department of Defense future budgets
may impact our future revenue and we have experienced some delays in project funding and contract
awards.

Department of Defense: Our Department of Defense business grew 33% in the third quarter of
fiscal year 2011 compared to the same quarter last year. The revenue growth resulted from our
recent acquisition of Advent Environmental in March of 2010 and increased activities from our
United States Corps of Engineers (USACE) projects at Ft. Irwin in California and Joint Base Lewis
McCord in Washington State. In addition, our large chemical demilitarization project in Tooele,
Utah (Tooele Project) has added $11.2 million revenue during the nine-month period ended April 1,
2011 as compared to last year. However, the completion of our Title II quality assurance work for
the Air Force Center of Engineering Excellence (AFCEE) in Iraq partially offset our growth.

Managements Discussion and Analysis of Financial Condition and Results of
Operations (continued)

Other Federal Government: Our other Federal government work consists of work for Federal
agencies including but not limited to the Environmental Protection Agency (EPA), National Oceanic
and Atmosphere Administration (NOAA), General Services Administration (GSA), Department of
Commerce (DOC) and Department of State (DOS). This sector, driven by two new awards with the
EPA and one with NOAA, grew 16% in the third quarter of fiscal year 2011 compared to the same
quarter last year.

State & Local: The sluggish U.S. economy continues to impact this sector of our business.
During the third quarter of fiscal year 2011 this segment made up 5% of the Companys business
compared to 4% during the same period last year. Our largest clients in this sector are: The
Maryland Department of Natural Resources, Horry County, South Carolina, Fairfax County, Virginia
and the Maryland Transportation Authority.

Commercial: Our commercial work remained relatively stable over the last year. This segment
made up 8% of the Companys business during the first nine months of fiscal year 2011 compared to
9% during the same period of fiscal 2010. We provide indoor air and greenhouse gas consulting to
clients such as Bank of America, local developers and Liberty Towers as part of the
Telecommunications industry component of our Program Management segment.

Acquisitions

We continue to evaluate strategic acquisition opportunities as acquisitions are an important
tenant of our growth strategy. In the third quarter of fiscal year 2010, the Company acquired
Professional Protection Systems, Ltd. (PPS), located in Milton Keynes, United Kingdom and Advent
Environmental, Inc. (Advent) headquartered in Charleston, South Carolina. PPS manufactures and
sells personal protective equipment to the nuclear industry, including protective suits,
decontamination showers, and emergency shelters. The acquisition of PPS enables the Company to
cross sell Versars existing personal protective offerings along with PPS offerings
internationally. PPS has been integrated into the Companys National Security business segments
existing line of personal protective equipment for chemical and biological protection. Advent is a
full service environmental contractor and has significant capabilities in Military Munitions
Response Plans (MMRP) and Unexploded Ordinance (UXO) clean up. The acquisition of Advent has
provided the Company with access to several new contract vehicles within the Department of Defense.
Advent has been integrated into the Companys Compliance and Environmental business segment. The
results of PPS and Advent were included in the Companys financial results for the first nine
months of fiscal year 2011.

While the Companys gross revenue during the first nine months of fiscal year 2011 increased
by 40% ($29.2 million) compared to the same period last year, approximately $14.0 million of the
increase in revenue was attributable to the contribution from the operations of Advent and PPS.

Backlog

The Companys firm backlog is identified as funded backlog, which represents orders for
goods and services for which firm contractual commitments have been received. Such contractual
commitments may take the form of a signed contract, a written task order under a large contract
vehicle, a master contract or other types of written authorization, including change orders to
existing written agreements. In the case of contracts with governments or governmental agencies
amounts are included in funded backlog when the firm contractual commitment is supported by funding
that has been appropriated and authorized for expenditure. Based on past experience, the Company
believes that at least 90% of funded backlog will be performed in the succeeding twelve month
period.

As of April 1, 2011, funded backlog for the Company was approximately $71.0 million, a
decrease of 6% compared to approximately $75.5 million as of March 26, 2010.

Managements Discussion and Analysis of Financial Condition and Results of
Operations (continued)

Results of Operations

The table below (in thousands) sets forth our results of operations for the three-month
periods and nine-month periods ended April 1, 2011 and March 26, 2010

For the Three-Month Periods Ended

For the Nine-Month Periods Ended

April 1,

March 26,

April 1,

March 26,

2011

2010

2011

2010

GROSS REVENUE

$

31,487

$

24,355

$

102,691

$

73,456

Purchased services and materials, at cost

14,457

13,750

53,565

39,870

Direct costs of services and overhead

12,818

9,346

38,443

28,246

GROSS PROFIT

$

4,212

$

1,259

$

10,683

$

5,340

GROSS PROFIT PERCENTAGE

13

%

5

%

10

%

7

%

Selling, general and administrative
expenses

2,380

2,256

6,384

6,469

Other expense

464

1,269

564

1,269

OPERATING INCOME (LOSS)

1,368

(2,266

)

3,735

(2,398

)

OTHER EXPENSE (INCOME)

Interest income

(35

)

(41

)

(155

)

(106

)

Interest expense

44

25

144

47

INCOME (LOSS) BEFORE INCOME TAXES

$

1,359

$

(2,250

)

$

3,746

$

(2,339

)

Gross revenue for the third quarter of fiscal 2011 was $31.5 million, an increase of 29%
compared to $24.4 million during the third quarter of last fiscal year. The Company benefited from
its two acquisitions and strong performance from its Compliance and Environmental Programs and
National Security business segments. Gross Revenue for the first nine months of fiscal 2011 was
$102.7 million, an increase of 40% compared to $73.5 million during the same period as last fiscal
year. The Company realized a large revenue gain from the new Tooele Chemical Demilitarization
project during its second quarter of fiscal year 2011.

Purchased services and materials for the third quarter of fiscal 2011 was $14.5 million, an
increase of 5% compared to $13.8 million during the third quarter of last fiscal year. Purchased
services and materials for the first nine months of fiscal 2011 was $53.6 million, an increase of
34% compared to $39.9 million during the same period as last fiscal year. The increase was due to large subcontractor costs
primarily related to the Tooele Chemical Demilitarization project.

Direct costs of services and overhead for the third quarter of fiscal 2011 was $12.8 million,
an increase of 38% compared to $9.3 million during the third quarter of last fiscal year. Direct
costs of services and overhead for the first nine months of fiscal 2011 was $38.4 million, an
increase of 36% compared to $28.2 million during the same period as last fiscal year. The Company
achieved higher direct labor utilization and revenue growth from three of its four business
segments.

Managements Discussion and Analysis of Financial Condition and Results of
Operations (continued)

Gross profit for the third quarter of fiscal 2011 was $4.2 million, an increase of 223%
compared to $1.3 million during the third quarter of last fiscal year. Gross profit for the first
nine months of fiscal 2011 was $10.7 million, an increase of 102% compared to $5.3 million during
the same period as last fiscal year. Gross profit benefited from higher revenue in all of our
business units and from improved profit margins in our Compliance and Environmental Programs
business segment, National Security business segment and the addition of the Task Force Safe
contract in Iraq.

Selling, general and administrative expenses for the third quarter of fiscal 2011 was $2.4
million, no significant change as compared to $2.3 million during the third quarter of last fiscal
year. Selling, general and administrative expenses for the first nine months of fiscal 2011 was
$6.4 million, no significant change compared to $6.5 million during the same period as last fiscal
year. Our cost reduction efforts, combined with ongoing efficiency improvements kept selling,
general and administrative expenses flat even as our revenue grew 40% during the first nine months
of fiscal year 2011. Selling, general and administrative also includes the severance reserve
expense related to the recently departed Chief Financial Officer, which was $250,000 for both the
third quarter and first nine months of fiscal 2011.

Other operating expenses for the third quarter of fiscal 2011 was $0.5 million as compared to
$1.3 million during the third quarter of last fiscal year. Other operating expenses for the first
nine months of fiscal 2011 was $0.6 million, as compared to $1.3 million
during the first nine months of the last fiscal year. The operating expenses for the three- and
nine-months ended April 1, 2011 was a result of the change in fair value of the contingent
consideration related to previous acquisitions. The operating expenses for the three- and
nine-months ended March 26, 2010 was a result of the Companys cost for acquisitions during these periods.

Operating income for the third quarter of fiscal 2011 was $1.4 million as compared to an
operating loss of $2.3 million during the third quarter of last fiscal year. Operating income for
the first nine months of fiscal 2011 was $3.7 million as compared to an operating loss of $2.4
million during the first nine months of last fiscal year. The change from operating loss to
operating income is attributable to the increased gross revenues and improved operating margins in
all of the Companys business segments.

Income tax expense for the third quarter of fiscal 2011 was $0.7 million as compared to income
tax benefit of $0.7 million during the third quarter of last fiscal year. This change from income
tax benefit to income tax expense was primarily due to the Company returning to profitability.
During the third quarter of fiscal 2011, income before income taxes was $1.4 million compared to
loss before income taxes of $2.3 million during the third quarter of last fiscal year. Income tax
expense for the first nine months of fiscal 2011 was $1.7 million as compared to income tax benefit
of $0.8 million during the first nine months of the last fiscal year. During the first nine months
of fiscal 2011, income before income taxes was $3.8 million compared to loss before income taxes of
$2.3 million during the first nine months of last fiscal year. The effective tax rates were 44%
and 32% for the first three quarters of fiscal 2011 and 2010, respectively. The increase in the
effective tax rate is a result of nondeductible expenses associated with the acquisition of Advent.

Net income for the third quarter of fiscal 2011 was $0.6 million as compared to net loss of
$1.5 million during the third quarter of last fiscal year. Net income per share for the third
quarter of fiscal 2011 was $0.07 as compared to net loss per share of $0.16 during the third
quarter of last fiscal year. Net income for the first nine months of fiscal 2011 was $2.1 million
as compared to net loss of $1.6 million during the first nine months of the last fiscal year. Net
income per share for the first nine months of fiscal 2011 was $0.23 as compared to net loss per
share of $0.17 during the first nine months of the last fiscal year. The change from net income
and net income per share from net loss and net loss per share is due to returning to profitability
driven by the increase in gross profit experienced in all of the Companys business segments.

Managements Discussion and Analysis of Financial Condition and Results of
Operations (continued)

Additional Information by Reportable Segment

Program Management

For the Three-Month Periods Ended

For the Nine-Month Periods Ended

April 1,

March 26,

April 1,

March 26,

2011

2010

2011

2010

Gross Revenue

$

14,608

$

13,993

$

41,738

$

45,858

Purchased services and materials, at
cost

8,274

9,908

24,661

31,287

Direct costs of services and overhead

3,779

2,975

12,182

10,281

Gross Profit

$

2,555

$

1,110

$

4,895

$

4,290

Gross Profit Percentage

17

%

8

%

12

%

9

%

Gross revenue for the third quarter of fiscal 2011 was $14.6 million, an increase of 4%
compared to $14.0 million during the third quarter of last fiscal year. This increase is a result
of the Task Force Safe contract in Iraq, offset by declines in the previous years Iraq Title II
quality assurance work. Gross revenue for the first nine months of fiscal 2011 was $41.7 million,
a decrease of 9% from $45.9 million during the same period as last fiscal year. The decrease is due to a decline in our United States construction activity.

Gross profit for the third quarter of fiscal 2011 was $2.6 million, an increase of 136%
compared to $1.1 million during the third quarter of last fiscal year. Gross profit for the first
nine months of fiscal 2011 was $4.9 million, an increase of 14% from $4.3 million during the same
period as last fiscal year. These increases in gross profit are due to the Task Force Safe
contract ramp up to its full potential and improved overall project management.

Compliance and Environmental Programs

For the Three-Month Periods Ended

For the Nine-Month Periods Ended

April 1,

March 26,

April 1,

March 26,

2011

2010

2011

2010

Gross Revenue

$

6,528

$

2,956

$

23,843

$

9,888

Purchased services and materials, at
cost

2,562

892

12,175

3,079

Direct costs of services and overhead

3,234

2,348

9,367

7,253

Gross Profit

$

732

$

(284

)

$

2,301

$

(444

)

Gross Profit Percentage

11

%

(10

%)

10

%

(4

%)

Gross revenue for the third quarter of fiscal 2011 was $6.5 million, an increase of 117%
compared to $3.0 million during the third quarter of last fiscal year. Gross revenue for the first
nine months of fiscal 2011 was $23.8 million, an increase of 140% from $9.9 million during the same
period as last fiscal year. These increases are a result of increased revenue from the Advent
acquisition in fiscal 2010 and new awards in the Companys risk assessment and regulatory component
of this segment.

Gross profit for the third quarter of fiscal 2011 was $0.7 million, a substantial increase as
compared to negative gross profit of $0.3 million during the third quarter of last fiscal year.
Gross profit for the first nine months of fiscal 2011 was $2.3 million, a substantial increase from
a negative gross profit of $0.4 million during the same period as last fiscal year. These
increases in gross profit are primarily due to the overall higher labor utilization and improved
performance in all of the Compliance and Environmental Programs business segment and the positive
affect of the Advent acquisition completed during the third quarter of fiscal year 2010.

Managements Discussion and Analysis of Financial Condition and Results of
Operations (continued)

Professional Services

For the Three-Month Periods Ended

For the Nine-Month Periods Ended

April 1,

March 26,

April 1,

March 26,

2011

2010

2011

2010

Gross Revenue

$

3,471

$

3,293

$

10,242

$

9,161

Purchased services and materials, at
cost

767

982

2,392

2,612

Direct costs of services and overhead

2,176

1,791

6.176

5,100

Gross Profit

$

528

$

520

$

1,674

$

1,449

Gross Profit Percentage

15

%

16

%

16

%

16

%

Gross revenue for the third quarter of fiscal 2011 was $3.5 million, an increase of 6%
compared to $3.3 million during the third quarter of last fiscal year. Gross revenue for the first
nine months of fiscal 2011 was $10.2 million, an increase of 11% from $9.2 million during the same
period as last fiscal year. These increases are a result of realized revenue growth at the
Companys Joint Base Lewis McCord project in Washington State.

Gross profit for both the third quarters of fiscal 2011 and 2010 were $0.5 million. Gross
profit for the first nine months of fiscal 2011 was $1.7 million, no material change from $1.5
million during the same period as last fiscal year.

National Security

For the Three-Month Periods Ended

For the Nine-Month Periods Ended

April 1,

March 26,

April 1,

March 26,

2011

2010

2011

2010

Gross Revenue

$

6,880

$

4,113

$

26,868

$

8,549

Purchased services and materials, at
cost

2,854

1,970

14,338

2,892

Direct costs of services and overhead

3,629

2,230

10,717

5,612

Gross Profit

$

397

$

(87

)

$

1,813

$

45

Gross Profit Percentage

6

%

(2

%)

7

%

1

%

Gross revenue for the third quarter of fiscal 2011 was $6.9 million, an increase of 68%
compared to $4.1 million during the third quarter of last fiscal year. Gross revenue for the first
nine months of fiscal 2011 was $26.9 million, an increase of 216% from $8.5 million during the same
period as last fiscal year.

Gross profit for the third quarter of fiscal 2011 was $0.4 million, an increase from negative
gross profit of $0.1 million during the third quarter of last fiscal year. Gross profit for the
first nine months of fiscal 2011 was $1.8 million, as compared to no gross profit during the same
period as last fiscal year. The improvement in revenue and gross profit are a result of the Tooele Chemical Demilitarization
project in Utah, the performance of our Military Munitions Programs in California and Nevada and
the positive effect of the Personal Protection Systems, acquisition completed in the third quarter
of fiscal year 2010.

Managements Discussion and Analysis of Financial Condition and Results of
Operations (continued)

Liquidity and Capital Resources

The Companys working capital as of April 1, 2011 was approximately $17.6 million, compared to
$15.3 million at June 25, 2010. The Companys current ratio at April 1, 2011 was 1.78, compared to
1.72 reported on June 25, 2010. The Companys financial ratios increased slightly due to the
increase in business volume resulting in higher accounts receivable as of April 1, 2011 compared to
March 26, 2010.

During the first nine months of fiscal year 2011, the Companys operating activities provided
approximately $0.6 million in cash flow. In addition, during the same period, the Company invested
$0.9 million primarily in property, plant and equipment. Such uses in cash were funded through
existing operating activities as well as net borrowings of approximately $2.3 million from the
Companys line of credit.

The Company has a line of credit facility with United Bank (the Bank) that provides for
advances up to $10 million based upon qualifying receivables. The line of credit is subject to
certain covenants related to the maintenance of financial ratios. These covenants require a
minimum tangible net worth of $17.5 million; a maximum total liabilities to tangible net worth
ratio not to exceed 2.5 to 1; and a minimum current ratio of at least 1.25 to 1. Borrowings under
the line of credit bear interest at prime less 1/2% with a floor interest rate of 4.5% (interest rate
was 4.5% at April 1, 2011). Failure to meet the covenant requirements gives the Bank the right to
demand outstanding amounts due under the line of credit, which may impact the Companys ability to
finance its working capital requirements. As of April 1, 2011, the Company had approximately
$2,353,000 in outstanding borrowings and was in compliance with the financial covenants of the
credit facility. The Company had no outstanding borrowings under this line of credit as of June
25, 2010. The Company has a letter of credit of approximately $455,000 outstanding under the line
of credit facility which serves as collateral for surety bond coverage provided by the Companys
insurance carrier against project construction work. The letter of credit reduces the Companys
availability on the line of credit. Availability under the line of credit at April 1, 2011 was
approximately $7.2 million. Obligations under the credit facility are guaranteed by Versar and
each of its domestic subsidiaries individually and are secured by accounts receivable, equipment
and intangibles, plus all insurance policies on property constituting collateral of Versar and its
domestic subsidiaries. The line of credit matures on September 25, 2011.

The Company believes that its current cash balances along with anticipated cash flows from
operations, and short term utilization of the Companys line of credit, will be sufficient to meet
the Companys liquidity needs during the current fiscal year. Expected capital requirements for
the remainder of fiscal 2011 were approximately $1,000,000, primarily for upgrades to maintain the
Companys existing information technology systems and facility improvements. These capital
requirements will be funded through existing working capital. Other major cash commitments for the
remainder of fiscal year 2011 are notes payable of approximately $668,000 and earn-out liabilities
related to the acquisitions of Advent and PPS totaling $1.1 million.

Critical Accounting Policies and Related Estimates That Have a Material Effect on Versars
Consolidated Financial Statements

Below is a discussion of the accounting policies and related estimates that we believe are the
most critical to understanding the Companys consolidated financial position and results of
operations which require management judgments and estimates, or involve uncertainties. Information
regarding our other accounting policies is included in the notes to our consolidated financial
statements included elsewhere in this report on Form 10-Q and in our annual report on Form 10-K
filed for fiscal year 2010.

Managements Discussion and Analysis of Financial Condition and Results of
Operations (continued)

Revenue recognition: Contracts in process are stated at the lower of actual costs
incurred plus accrued profits or incurred costs reduced by progress billings. On cost-plus fee
contracts revenue is recognized to the extent of costs incurred plus a proportionate amount of fee
earned, and on time-and-material contracts revenue is recognized to the extent of billable rates
times hours delivered plus material and other reimbursable costs incurred. The Company records
income from major fixed-price contracts, extending over more than one accounting period, using the
percentage-of-completion method. During the performance of such contracts, estimated final
contract prices and costs are periodically reviewed and revisions are made as required. Fixed
price contracts can be significantly impacted by changes in contract performance, contract delays,
liquidated damages and penalty provisions, and contract change orders, which may affect the revenue
recognition on a project. Revisions to such estimates are made when they become known. Detailed
quarterly project reviews are conducted with project managers to review all project progress
accruals and revenue recognition.

There is the possibility that there will be future and currently unforeseeable adjustments to
our estimated contract revenues, costs and margins for fixed price contracts, particularly in the
later stages of these contracts. Such adjustments are common in the construction industry given
the nature of the contracts. These adjustments could either positively or negatively impact our
estimates due to the circumstances surrounding the negotiations of change orders, the impact of
schedule slippage, subcontractor claims and contract disputes which are normally resolved at the
end of the contract.

Allowance for doubtful accounts: Disputes arise in the normal course of the Companys
business on projects where the Company is contesting with customers for collection of funds because
of events such as delays, changes in contract specifications and questions of allowable costs and
collectability. Such disputes, whether claims or unapproved change orders in process of
negotiation, are recorded at the lesser of their estimated net realizable value or actual costs
incurred and only when realization is probable and can be reliably estimated. The Company further
evaluated its current notes receivable and anticipated full payment of principal and interest in
accordance with the note payment terms.

Management reviews outstanding receivables on a quarterly basis and assesses the need for
reserves, taking into consideration past collection history and other events that bear on the
collectability of such receivables. All receivables over 60 days old are reviewed as part of this
process.

Asset retirement obligation: The Company recorded an asset retirement obligation
associated with the estimated clean-up costs for its chemical laboratory in its National Security
business segment. In accordance with ASC-410-20-05, the Company originally estimated the costs to
clean up the laboratory and return it to its original state at a fair value of approximately
$497,000, which was increased to $663,000 at April 1, 2011. The Company recorded $98,000 of
expense during the nine-month period ended April 1, 2011 related to this obligation.

Goodwill and other intangible assets: The carrying value of goodwill is approximately
$5,758,000 relating to the acquisition of Versar Global Solutions, Inc., Professional Protection
Systems, Limited and Advent Environmental, Inc. In performing its goodwill impairment analysis,
management has utilized a market-based valuation approach to determine the estimated fair value of
the acquired entities in the business segments where those entities reside. Management engages
outside professionals and valuation experts annually, as necessary, to assist in performing this
analysis and will test more often if events and circumstances warrant it. Should the business
segments financial performance not meet estimates, then impairment of goodwill would have to be
further assessed to determine whether a write down of goodwill value would be warranted. If such a
write down were to occur, it would negatively impact the Companys financial position and results
of operations. However, it would not impact the Companys cash flow or financial debt covenants.

Share-based compensation: The Company records stock based compensation in accordance
with the fair value provisions of ASC 718-10-1. This statement requires companies to recognize the
cost of employee services received in exchange for awards of equity instruments based on the
grant-date fair value of those awards (the fair-value-based method).

Managements Discussion and Analysis of Financial Condition and Results of
Operations (continued)

In the first nine months of fiscal year 2011, the Company awarded 24,000 shares of restricted
stock to key employees in recognition of their outstanding performance in the prior year and 27,500
shares to Board members for their service in fiscal year 2011. In the first nine months of fiscal
year 2011, the Company recorded compensation expense of $127,000.

In July 2010, the FASB issued authoritative guidance that enhances disclosures about the
credit quality of financing receivables and the allowance for credit losses. The guidance is
intended to provide additional information to assist financial statement users in assessing an
entitys credit risk exposures and evaluating the adequacy of its allowance for credit losses.
During the nine-months ended April 1, 2011, the Company adopted this accounting guidance. On
December 31, 2010, the Company began to disclose the required information about the credit quality
of its receivables. On January 1, 2011, the Company began to disclose the required information
about the activity of its allowance for doubtful accounts. The adoption of this guidance did not
impact the Companys consolidated financial position, results of operations or cash flows, as its
requirements are disclosure-related in nature. Refer to Note F for enhanced disclosure on the
Companys financing receivables as required by the adoption of this new guidance.

Recently Issued Accounting Guidance

In December 2010, the FASB issued authoritative guidance on the goodwill impairment test for
reporting units with zero or negative carrying amounts. The new accounting guidance modifies step
1 of the impairment test whereby an entity should consider whether there are any adverse
qualitative factors that may exist that would indicate it is more likely than not that a goodwill
impairment exists. This may result in companies reporting goodwill impairments sooner as compared
to under the current accounting guidance. This new accounting guidance is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2010 and will apply to
the Company beginning with its fiscal year starting July 2, 2011. Early adoption of this guidance
is not permitted. The Company will evaluate the impact of this guidance on its financial condition,
and results of operation upon adoption.

In December 2010, the FASB issued interpretive guidance on the pro forma revenue and earnings
disclosure requirements for business combinations. The interpretive guidance specifies that an
entity should disclose revenue and earnings of the combined entity as though the business
combination that occurred during the year had occurred as of the beginning of the comparable prior
annual reporting period. Also, supplemental pro forma disclosures should be expanded to include a
description of the nature and amount of material, non-recurring pro forma adjustments directly
attributable to the business combination included in the reported pro forma revenue and earnings.
This new accounting guidance is effective for a business combination with an acquisition date on or
after the beginning of the first annual reporting period beginning on or after December 15, 2010
(which is June 30, 2011 for the Company). Early adoption of this guidance is permitted. The
Company will implement this guidance for any future business combinations.

Impact of Inflation

Versar seeks to protect itself from the effects of inflation. The majority of contracts the
Company performs is for a period of a year or less or is cost-plus-fixed-fee type contracts and,
accordingly, is less susceptible to the effects of inflation. Multi-year contracts include
provisions for projected increases in labor and other costs.

Contingencies

Versar and its subsidiaries are parties to various legal actions arising in the normal course
of business. The Company believes that the ultimate resolution of these legal actions will not
have a material adverse effect on its consolidated financial position and results of operations.

Managements Discussion and Analysis of Financial Condition and Results of
Operations (continued)

Business Segments

Versar currently operates in four business segments: Program Management, Compliance and
Environmental Programs, Professional Services, and National Security.

ITEM 3

Quantitative and Qualitative Disclosure about Market Risk

The Company has not entered into any transactions using derivative financial instruments or
derivative commodity instruments and believes that its exposure to interest rate risk and other
relevant market risk is not material.

ITEM 4

Controls and Procedures

As of the last day of the period covered by this report, the Company carried out an
evaluation, under the supervision of the Companys Chief Executive Officer and Principle Accounting
Officer, of the effectiveness of the design and operation of the Companys disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures
are effective, as of such date, to ensure that required information will be disclosed on a timely
basis in its reports under the Exchange Act.

Further, our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures have been designed to ensure that information required to be
disclosed in reports filed by us under the Exchange Act is accumulated and communicated to our
management, including the Chief Executive Officer and Chief Financial Officer, in a manner to allow
timely decisions regarding the required disclosure.

There were no changes in the Companys internal control over financial reporting during the
last quarter that have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.

Versar and its subsidiaries are parties from time to time to various legal actions arising in
the normal course of business. The Company believes that any ultimate unfavorable resolution of
these legal actions will not have a material adverse effect on its consolidated financial condition
and results of operations.

Item 2

 Unregistered Sales of Equity Securities and Use of Proceeds

During the third quarter of fiscal year 2011, employees of the Company surrendered shares of
common stock to the Company to pay tax withholding obligations upon vesting of restricted shares.
The purchase price of this stock was based on the closing price of the Companys common stock on
the NYSE Amex on the date of surrender.

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